STRENGTHS

WEAKNESSES

Small market, unfavourable demographics (38% of the population living abroad)

Dependence on tourism (8% of employment) and external capital

Huge trade deficit

Unilateral euro adoption precludes ECB support and reduces the effectiveness of monetary policy

Electricity production based largely (50%) on subsidised coal

Deficient road and electrical networks

High structural unemployment: 14% of people are unemployed, 60% of whom have been unemployed for more than two years, lack of qualified personnel

Large informal economy (25% of the working population) and low participation rate among women (56%)

Importance of ethnic voting and lack of political alternatives

Poor institutional environment: corruption, media independence, organised crime and politicisation of the court system affect contract performance and the treatment of insolvency

RISK ASSESSMENT

Growth continues to slow in the wake of investment

Activity will slacken further in 2020. While private investment (20% of GDP), both foreign and domestic, in tourism and energy infrastructure is expected to remain strong, public investment (10% of GDP) is set to decline due to the completion of the first 41 km section between Podgorica and Mateševo of the motorway to connect the port of Bar to Boljare on the Serbian border (6% of GDP in 2019). Conversely, private consumption will continue to make a moderate, but positive, contribution to growth. Flat wages (except in tourism-related sectors such as trade, accommodation, food and construction) are expected to be offset by employment and credit growth. The contribution from foreign trade should turn positive due to the continued tourism boom and the sharp decline in imports related to motorway construction.

Further budgetary consolidation with the (provisional?) completion of the motorway project

Thanks to significant budgetary efforts since 2017, the government deficit has been slashed. A primary surplus (i.e. excluding debt interest) of up to 1.5% (3% excluding motorway-related expenditure) is even expected in 2020. Nevertheless, public debt remains very high and has soared with the loan (15% of the total outstanding amount) taken out with China Eximbank to finance the motorway. This project, whose total cost is equivalent to a quarter of GDP, is being carried out by China Road & Bridge with 30% local subcontracting. It is 85% financed by a 20-year US dollar loan at a rate of 2% with a 6-year grace period. The external share of public debt (84%) is denominated in dollars. Its reduction and sustainability depend, in particular, on maintaining budgetary discipline. VAT, the main source of income (31%), suffers from many exemptions. Tax breaks to attract foreign investment in tourism, such as the reduced 7% VAT rate for luxury hotels, are costly. Current expenditure, primarily wages and pensions, leaves little room for investment (less than 5% of GDP), while gaps in education and health persist. The pension system is in deficit – more than 2% of GDP in 2018, financed by the State – due to many early retirements. Forecasts could be modified by the upside spending risk in the run-up to the 2020 parliamentary elections. Finally, there is doubt about the completion of the motorway and how it will be financed. While finishing phase 2 would cost only the equivalent of 5% of GDP, building all remaining 136 kilometres would cost 25%.

The current account deficit will remain very high due to the enormous deficit in trade in goods (45% of GDP). Exports, mainly of oil and aluminium derivatives from the Kombinat Aluminijuma in Podgorica, are largely offset by investment-related imports, but also by imports of food and oil products. Russian, Serbian and Bosnian tourists generate a surplus of 20% of GDP and remittances from expatriates (mainly from Serbia, Croatia and Turkey) a surplus of 5.7%. In the end, the current account deficit is financed by FDI (10% of GDP) and debt (12%), not to mention undeclared capital inflows invested in second homes. The country hopes to increase FDI through its Citizenship By Investment programme launched in 2019 and running until the end of 2021. In return for investing a minimum of €350,000, up to 2,000 foreign investors will be able to obtain a Montenegrin passport, which will allow them to travel without a visa to many countries. External debt (168% of GDP at the end of 2018), a quarter of which corresponds to intra-group loans, will grow in line with its public share (37% of the total), while depending on growth and tourism revenues.

Milo Djukanovic and the DPS still in power

Milo Djukanovic, the long-time leader of the Democratic Party of Socialists (DPS) that emerged out of the former Communist Party, won the April 2018 presidential election in the first round. Previously, as with all elections since 1991, the DPS had come out on top in the 2016 parliamentary elections. taking 36 seats out of 91, far ahead of the main opposition party, the pro-Russian and pro-Serb Democratic Front (18 seats), whose leaders were convicted of involvement in an alleged coup attempt in the same year. Following Mr Djukanovic's (ultimately temporary) withdrawal from politics in 2016, Duško Marković took over as head of a coalition government bringing together the DPS and ethnic minority parties. The government has completed the NATO accession process and is continuing EU accession negotiations. Despite waning popular support and widespread criticism of a law to seize property held by the Serbian Orthodox Church, which is the largest denomination in the country, the next legislative elections in autumn 2020 may see the incumbents take victory in the absence of a credible alternative.